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GREEN SHOE OPTION

B. Umapathy (student) (405 Points)

14 December 2009

Sir/ Madam/Friends,

Please explain

1. Is there any provision regarding "The Green Shoe Option" in The Companies Act Or it is a SEBI Guidelines

2. In india any company opted this?

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7 Replies

Shruti (stu) (77 Points)
Replied 14 December 2009

Dear buddy please describe "The Green Shoe Option".

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raju.. (N/A.) (142 Points)
Replied 14 December 2009

Lot of prominent Indian companies especially big PSUs have opted for the Green shoe Provision. The companies tend to be blue chips. I believe SEBI has specific provisions for this

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 14 December 2009

Cairn India Adopted for the Green shoe Option when it shares was first listed in the stock exchange you can Find about Green Shoe Option in SEBI .i.e alloting shares over and above than what is intended to be issued to Public via offer Document..Experts will tell more about this

mukesh (CS) (35 Points)
Replied 14 December 2009

Hi Green Shoe option is regulated by SEBI and the process was first used by a Company called green shoe, hence the name of the process is derived as Green Shoe option. It work like this - a certain amount of shares are issued to a person (generally a merchant banker ) lets say about 5 %. The person will be responsible to stabilse the price at the time of IPO, if teh price rises beyond the certain level then the person will offload some shares and if the price falls then the person will buy the shares. An agreement is executed with the Company and Person and all the understanding are mentioned therein.

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shailesh agarwal (professional accountant) (7642 Points)
Replied 14 December 2009

What is green shoe option in an IPO ?

A 'green shoe option' in an IPO allows the issuing company to offer more shares than the original prospectus amount if the deal is heavily over subscribed.

Its a provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.

A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

Example: A company files to sell 10 million shares in an IPO with a 10% green show option; if the deal has large demand they have the option to issue an additional 1 million shares (10% of the original 10 million).

Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.

The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.in India ICICI introduced this concept.

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shailesh agarwal (professional accountant) (7642 Points)
Replied 14 December 2009

SEBI (DIP) Amendements - Guidelines

Major amendments have been made by SEBI on 14-8-2003, in the Disclosure and Investor Protection Guidelines 2000. These have been made based on recommendation of various committees set up by SEBI. The purpose of amendments, as stated in SEBI circular dated 14-8-2003 are – (a) to enhance the level of investors’ protection (b) to increase the transparency and efficiency of the primary market (c) to strengthen the disclosure and eligibility norms for issuer companies and (d) to rationalize and simplify various operational procedures in the primary market so as to facilitate raising of resources by the issuer companies.

Effective date - The amendments of the Guidelines shall come into force with effect from 14-8-2003. These shall be applicable to all Public Issue/Rights Issue/Offer for Sale for which observations have not been issued by SEBI till date.

Green Shoe Option

Green Shoe option means an option of allocating shares in excess of the shares included in the public issue. Its main purpose is to stabilize post listing price of the newly issued shares. It is being introduced in the Indian Capital Market in the initial public offerings using book building method. It is expected to arrest the speculative forces.

The basic purpose of ‘green shoe option’ is not to make available additional share capital to company, but to act as stabilizing force, if issue is over subscribed. The shares held by promoters are lent to Stabilising Agent (SA) and returned by SA to them after the purpose is over. Promoters do not get any profit in this transaction.

The green shoe option is available only in case of IPO and not for subsequent issues.

"Green Shoe option" means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism, which is granted to a company to be exercised through a Stabilising Agent [clause 1.2.1(xiii-a)].

A company desirous of availing the option granted by this Chapter, shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘stabilizing agent’ (SA) at the end of the stabilization period in terms of clause 8A.15. [clause 8A.1]

The company shall appoint one of the Lead book runners as the "stabilizing agent" (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company [clause 8A.2]

The SA shall also enter into an agreement with the promoters who will lend their shares Maximum number of shares that may be borrowed from the promoters shall not be in excess of 15% of the total issue size. [clause 8A.3].

The details of the agreements mentioned in clause 8A.2 (between Company and SA) and 8A.3 (between SA and promoters) shall be disclosed in the draft Red Herring prospectus, Red Herring prospectus and the final prospectus.

The SA shall borrow shares from the promoters of the company to the extent of the proposed over-allotment. These shares shall be in dematerialized form only [Clause 8A.7]. The allocation of these shares shall be pro-rata to all the applicants [clause 8A.8].

The stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchanges [clause 8A.9].

The prime responsibility of the SA shall be to stabilize post listing price of the shares. To this end, the SA shall determine the timing of buying the shares, the quantity to be bought, the price at which the shares are to be bought etc. [clause 8A.14].

The idea is that due to excess supply of shares (permitted upto 15%), market price will not shoot up at abnormally high level. However, if price of shares goes below issue price, SA will buy share from the market, so that price rises. If despite excess supply of shares, price continues to be higher than the issue price, there is no question of buying the shares from market, as that will further aggravate the market price.

On expiry of the stabilization period, in case the SA does not buy shares to the extent of shares over-allotted by the company from the market, the issuer company shall allot shares to the extent of the shortfall in dematerialized form. [clause 8A.15].

The SA shall remit an amount equal to (further shares allotted by the issuer company) * (issue price) to the issuer company from the GSO Bank Account. The amount left in this account, if any, after this remittance and deduction of expenses incurred by the SA for the stabilization mechanism, shall be transferred to the investor protection fund(s) of the stock exchange(s). [clause 8A.17] - - Thus, promoters/company do not benefit from this transaction.

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Airody Manjunatha Alse (ca) (100 Points)
Replied 15 December 2009

What Does Greenshoe Option Mean?
A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.

A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

Sorry yar, Iam not in the share field.

Come in touch with you soon.